Are Investors Nuts To Value Uber At $18 Billion?

One of the problems with reporting on the latest venture-capital dealings over and over is that it’s easy to become jaded. Today’s confirmation that taxi-alternative Uber has raised a whopping $1.2 billion at a valuation of $18.2 billion is a perfect case in point. The Wall Street Journal’s Christopher Mims thinks investors have gone loopy: “What do I think of Uber’s $18.2 billion valuation? I think it’s nuts,” he tweeted. But crazy is is in the eye of the beholder, and a lot of people are looking at Uber through the wrong lens.

Many of the reports, including the one here at Forbes, drew comparisons to existing transportation companies, most especially car-rental firms Hertz and Avis. Those two, coincidentally, are valued at $18.7 billion combined, almost precisely what investors think Uber is currently worth. And while there is some utility in any comparison — I was caught marveling the other day that Facebook could buy Ford easily — the implication of a parallel between the businesses isn’t accurate. Most of us will rent a car somewhere between 0-2 times a year when we’re on vacation or traveling for work. It’s a pretty infrequent occurrence, like air travel itself.

Taking an Uber (or a taxi or a Lyft) is an entirely different experience. Many do it daily, sometimes several times a day. So that naturally leads people to compare Uber to the taxi business, which was done over at Iterative Path. There, Rags Srinivasan does a pretty quick calculation that shows even if Uber gets half of the world’s taxi business — which he says is a $22 billion market by his own “generous” estimates — it can’t possibly be worth the $18 billion investors just paid.

How then did these folks pony up more than $1 billion at such a foolish price? Mims thinks they just are drinking the Kool Aid. “Uber has also touted itself as something much bigger than a transportation alternative, and in New York City it’s experimenting with becoming a courier service,” he wrote at the WSJ. But that’s not the case. Travis Kalanick, Uber’s CEO made that clear to Evelyn Rusli at the Journal. “We didn’t pitch the logistics business in this fundraising,” he said, explaining the valuation was justified by the existing ridesharing endeavor and its recent doubling of revenues every 6 months.

Mims is one of the smartest guys in technology business reporting. When he was recently hired by the WSJ, I tweeted this: “.@mims WSJ really needs / is lucky to get you. Must-read status to be restored soon.” But this time, I couldn’t disagree with him more. So long as you look at Uber as a taxi replacement, you’ll see it as something less than it’s already becoming in its early markets: A transportation app. In San Francisco, for years the taxi commission didn’t want to issue more medallions for additional cabs because there was ostensibly no real demand for them (As of last year, the city had 1,600 taxi medallions). Yet just 4 years after Uber’s launch, there are often well over 1,000 rideshare vehicles on the road during peak times.

Wait, what? Surely all those additional cars aren’t making any money, right? Actually, they are. In fact, demand is so strong Uber is guaranteeing drivers $40 an hour in gross fares throughout the summer during prime time (the company takes a 20% commission and $1 per ride for insurance, so drivers make less than the nominal amount — but typically far more than they would driving a taxi). I’m writing this during the Friday evening rush hour and trying to get an estimate of just the empty cars in San Francisco’s financial district and South of Market area, where people are likely getting read to head home from work. It’s difficult to count them, there are so many.

Notably, the population of Uber’s out in the city’s more residential neighborhoods like the Sunset and Richmond, on the western edge of San Francisco is also high. A quick check of the Lyft app shows similarly ubiquitous vehicles, though far fewer in total. Uber’s not a big fan of releasing metrics on just how well its doing, but it seems probable that out here, where the company first launched, it will be bigger than the entire taxi industry within a year or two if it isn’t already. And that’s true even though it will continue to compete with Lyft, Sidecar and possibly others.

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